Non-compete agreements are contracts that can restrict your ability to work for a competitor, start a similar business, or operate within a specific industry after leaving a job. Whether you’re an employee handed a non-compete during onboarding or an employer drafting one to protect your interests, it’s essential to understand how these agreements function under current U.S. law and how that could soon change.
These contracts have become increasingly common in recent years, spanning industries and job levels, from corporate executives to service workers. While employers argue non-competes protect proprietary information and customer relationships, critics contend they unfairly limit worker mobility and suppress wages. As legal scrutiny intensifies, particularly at the federal level, it’s crucial to understand the current state of the law and its potential evolution shortly.
This guide breaks down the enforceability of non-compete clauses, explains the differences between related restrictions, and outlines the proposed FTC Non-Compete Rule that could reshape the legal landscape nationwide.
What Is a Non-Compete Clause?
A non-compete clause is a contractual agreement in which an employee agrees not to compete with an employer after the employment relationship ends. These clauses are designed to protect legitimate business interests, including trade secrets, client relationships, and proprietary processes.
Although they are sometimes packaged within larger employment agreements or compensation packages, non-competes function independently and impose post-employment restrictions that can affect a worker’s ability to earn a living. Due to their long-lasting implications, courts scrutinize them.
Non-compete clauses often include:
- A time limitation (e.g., 6 months to 2 years)
- A geographic restriction (e.g., within a particular city or state)
- A defined scope of restricted activities
Courts typically assess the reasonableness of these factors when determining the enforceability of a contract. A clause that is too broad or vague is more likely to be struck down in court.
Are Non-Compete Agreements Enforceable?
Yes, however, it depends. The enforceability of a non-compete clause varies significantly across states. While some states, such as California, broadly ban non-compete agreements, others permit them with specific restrictions.
Courts aim to strike a balance between the employer’s need to protect legitimate interests and the employee’s right to seek new work. A well-drafted agreement that targets only what is necessary stands a much higher chance of enforcement than one that casts a wide, unreasonable net. Overly aggressive restrictions are often deemed unenforceable, especially when they appear to punish rather than protect.
Courts usually consider:
- Time: Is the restriction limited to a reasonable period?
- Geography: Does it only cover areas where the employer genuinely operates?
- Business Interests: Is the employer protecting trade secrets or other legitimate interests?
- Undue Hardship: Would enforcement place an unfair burden on the employee?
These factors vary not only by jurisdiction but also by job level, with courts more likely to uphold non-competes for executives than for entry-level workers.
A Patchwork of State Laws
Each state handles non-compete enforcement differently. The divergence in non-compete law is one of the key reasons the FTC has proposed a national rule. For now, anyone subject to a non-compete agreement must carefully review their state’s laws to understand what is enforceable.
Employers operating in multiple states often find it challenging to develop a one-size-fits-all policy for restrictive covenants. That’s why legal counsel is frequently necessary to tailor agreements that meet each state’s legal requirements. State law may also limit enforceability based on industry, job function, or income level.
For example:
- California prohibits almost all non-competes.
- North Dakota and Oklahoma have similar bans in place.
- Florida, Texas, and New York permit non-competes if they are narrowly tailored and protect legitimate business interests.
A state-by-state breakdown of non-compete enforceability underscores the importance of local legal expertise before signing or drafting such agreements.
What Is the FTC Non-Compete Rule?
In April 2024, the Federal Trade Commission (FTC) announced a groundbreaking regulation, the FTC Non-Compete Rule, that would effectively ban most non-compete clauses nationwide.
If enacted and upheld, the rule would invalidate the majority of non-compete agreements nationwide, including those currently in effect. It represents a significant shift in federal labor policy, driven by a growing concern that non-competes suppress wages, limit employee mobility, and reduce competition.
The FTC developed this rule after years of economic research and public commentary, concluding that non-compete clauses do more harm than good in most labor markets. Still, the rule is currently facing legal challenges from business groups and may not go into effect immediately.
Key points of the proposed FTC Non-Compete Rule:
- General Ban: Non-competes would be unlawful for nearly all workers.
- Retroactive Scope: Existing non-compete clauses would need to be rescinded.
- Senior Executives: Limited exceptions may apply to individuals earning above a defined income threshold.
- Notice Requirement: Employers would be required to notify affected employees that their non-competes are no longer enforceable.
The FTC rule is currently not in effect. Although it has been finalized, several legal challenges could still delay or overturn its implementation. For now, employers and employees must comply with existing state laws.
You can read more in the FTC’s Compliance Guide, which outlines the intended scope and exceptions of the rule.
How Non-Competes Compare to Other Agreements
It’s essential to recognize that non-competes are merely one type of post-employment restriction. Employers often rely on a combination of agreements to safeguard their business interests, each with its distinct legal standards for enforcement.
While a non-compete clause may limit an employee’s ability to work elsewhere, a non-solicitation clause restricts who they can contact, and a confidentiality agreement governs the handling of sensitive information. Employees should carefully examine all clauses in their contracts, not just the non-compete, before signing.
These agreements can be enforceable even if a non-compete agreement is not, depending on the state law and contract language.
- Non-Compete Clause- Prevents competition after employment ends
- Non-Solicitation Clause- Prohibits soliciting clients, vendors, or coworkers post-employment
- Confidentiality Agreement- Prohibits disclosing proprietary or trade secret information
Common Industries Where Non-Compete Clauses Appear
Non-compete clauses have become increasingly common across industries, often extending far beyond their original intended use for executives or inventors. Today, employees in sales, healthcare, and even food service may be asked to sign.
Understanding the industry standard can help determine whether the restriction is reasonable or overreaching. Many critics of non-compete agreements argue that they have become too widespread, particularly in lower-wage positions where trade secrets are not involved.
The FTC estimates that nearly 30 million U.S. workers are currently bound by non-compete agreements, including many in low-wage roles, one reason the proposed FTC Non-Compete Rule has garnered so much attention.
How to Protect Yourself Before Signing a Non-Compete
Before agreeing to a non-compete, it’s essential to think long term. How might this affect future job opportunities? Is the restriction proportionate to the benefit you’re receiving from the employer?
In many cases, employees sign non-compete agreements without fully understanding their implications. Asking the right questions and consulting with an employment attorney can help you avoid signing away future opportunities or running into unexpected legal issues.
If you’re asked to sign a non-compete clause, consider taking the following steps:
- Understand the Basics of Non-Compete Agreements: Before taking any action, it’s essential to know what a non-compete is, what it restricts, and how it may impact your career or business
- Request Clarification: Ask for details on the scope, duration, and geographic limits.
- Seek Legal Review: An attorney can evaluate whether the agreement is enforceable in your state.
- Negotiate Terms: You may be able to reduce the restrictions or swap a non-compete for a non-solicitation clause.
- Document Communications: Keep a record of any verbal promises or changes made to the agreement.
Employers: How to Protect Your Business Without Overreaching
Employers walk a fine line between protecting their business and overstepping legal limits. A well-structured agreement should be tailored, defensible, and compliant with both current state law and potential future federal regulations.
When using non-compete clauses, employers should avoid boilerplate language and instead focus on the specific needs of the business. Overly broad restrictions can invite litigation and reputational harm. Transparent communication with employees helps ensure understanding and compliance.
Employers looking to protect their competitive edge should:
- Use non-compete clauses only when truly necessary
- Consider narrower alternatives like non-solicitation or confidentiality agreements
- Ensure contracts are compliant with state laws and evolving FTC guidance
- Provide clear notice to employees about their rights and obligations
The FTC recommends that businesses begin preparing compliance plans in case the FTC Non-Compete Rule survives legal challenge and takes effect nationwide.
How Cantrell Schuette Can Help
At Cantrell Schuette, we assist both employees and businesses in navigating the complexities of non-compete agreements. Our team of non-compete attorneys stay current on evolving legal standards at both the state and federal levels, including ongoing developments related to the FTC Non-Compete Rule. Whether you’re reviewing a proposed agreement, seeking to enforce or challenge an existing clause, or planning to mitigate risk, we provide practical, strategic legal guidance tailored to your specific goals.
Understanding your rights under a non-compete clause is more important than ever. As laws shift and regulations tighten, it’s critical to make informed decisions that protect your livelihood or business interests. Contact Cantrell Schuette today to schedule a consultation and explore how our attorneys can assist you with your non-compete concerns.
